Underwriting of SPVsUnderwriting of SPVs

Underwriting of SPVs

13. An ADI may act as an underwriter or committed dealer for the issue of securities by a SPV, and treat the facility as an underwriting facility for capital adequacy purposes, where:

(a) the extent of any undertaking provided to a SPV is clearly specified in a written agreement, and there is no recourse to the ADI beyond the contractual obligations contained therein;

(b) the ADI is able to demonstrate that the facility is provided on an arm’s length basis, on market terms and conditions (including price/fee) and is subject to the ADI’s normal credit approval and review processes;

(c) the facility is limited to a specified amount and time period;

(d) the SPV has an express right to select an alternative party to provide the facility;

(e) the facility is documented in a manner that clearly separates it from any other facility provided by the ADI;

(f) the underwriting is exercisable only when an issuer cannot issue securities into the market at a price equal to (or above) the benchmark predetermined in the underwriting agreement;

(g) the ADI has the ability to withhold payment, and to terminate the facility if necessary, upon the occurrence of specified events (e.g. material adverse changes or defaults on assets above a specified level); and

(h) there is a market for the type of securities underwritten, or for which the ADI acts as a committed dealer.[20]

Where these conditions are not met, the facility should be regarded as a credit enhancement.

14. Where an ADI commits to underwrite or to acquire subordinated securities issued by a SPV, the ADI will be deemed to have entered into a credit enhancement. The ADI should report, for the term of such facilities, the portion of the facility covering subordinated securities as a credit enhancement facility for capital adequacy purposes.

15. An ADI that underwrites, or acts as the sole dealer for the initial issue of securities by a SPV, may underwrite up to 100 per cent of the initial issue and/or acquire up to 100 per cent of the initial issue. Where, at any given time, an ADI is committed to underwriting and/or acting as “sole dealer” for multiple issues of securities by a SPV or collection of vehicles it should inform APRA. An ADI should endeavour to ensure that its risk (particularly in relation to credit and liquidity) exposures from these activities are modest relative to the resources of the ADI. An ADI may not act as a committed dealer in any other circumstance without APRA approval.

16. An ADI may undertake further acquisitions of securities issued by a SPV for its own account in the three months period following the underwriting. The ADI should on-sell its holding of securities acquired through underwriting so that its overall holding would not exceed the limit placed on purchases of securities (paragraph 19(b) of AGN 120.3) three months after the underwriting has been completed.

17. Where an ADI’s holdings of securities through underwriting have not fallen below the 20 per cent threshold three months after acquisition, the ADI should inform APRA of the reason for the continued holdings above this level. The ADI must mark to market the securities held for regulatory and financial statement reporting purposes. The ADI should demonstrate to APRA that it has a strategy in place, to either reduce its holding below the 20 per cent threshold over the medium term, restructure the scheme, or wind up the SPV. Where it cannot demonstrate this, the holding in excess of the 20 per cent level may be subject to a penal capital treatment e.g. a deduction from the capital base or a risk weighting above 100 per cent.

18. An ADI may participate in a revolving underwriting facility, or an underwriting facility covering subsequent issues of securities by a SPV, where:

(a) the conditions in sub-paragraphs 13(a)-(h) are met;

(b) the ADI’s commitment to take up securities cannot be triggered by the failure of the SPV to meet its obligations, other than where such failure results from an inability to roll-over securities due to adverse market conditions; and

(c) an independent party acts as co-underwriter, or a sub-underwriting agreement exists, for at least 20 per cent of securities to be issued. The ADI should hold only “several” liability under the terms of the facility.

19. For the purposes of sub-paragraph 18(c), the sub-underwriting agreement should provide that:

(a) the sub-underwriter is independent of the ADI;

(b) the agreement is executed before the securities are issued;

(c) the agreement is transacted on an arm’s length basis, on market terms and conditions, and is subject to the ADI’s normal credit approval and review processes;

(d) the sub-underwriter can be excused from meeting its obligations only on the same basis upon which the ADI may be excused from meeting its obligations under the underwriting facility; and

(e) the ADI does not perform its functions as underwriter where the sub‑underwriter exercises its right to be excused from meeting its obligations.

20. Where the conditions in paragraph 18 (and 19, if applicable) are satisfied, the revolving underwriting facility may be treated as an underwriting facility for capital adequacy purposes. Otherwise, the facility should be regarded as a credit enhancement.

21. Where it is not practicable for an ADI to locate a co- or sub-underwriter (e.g. due to the small size of the issue of securities, client sensitivities or other matters), the ADI may underwrite 100 per cent of the issue of securities and treat the facility as an underwriting facility for capital adequacy purposes, provided:

(a) the conditions in sub-paragraphs 13(a)-(h) are met;

(b) the ADI can demonstrate its ability in placing securities of the type underwritten; and

(c) the amount of the ADI’s aggregate commitment under all such underwriting facilities (as “sole dealer”) is less than 20 per cent of the ADI’s capital base.

Where any of these conditions are not met, the facility should be regarded as a credit enhancement.

22. Where an ADI has taken up securities as a result of a revolving underwriting facility or dealing commitment, provisions of paragraphs 16 and 17 will apply.

Lending Facilities